Daily Market Brief 2 August 2017

Manufacturing Surprise Lifts Pound

August 2nd: Highlights

  • MPC and Inflation report due tomorrow
  • U.S. Construction spending fall adds to dollar woes
  • Eurozone Growth beats expectations

MPC facing conflicting factors

The Bank of England’s Monetary Policy Committee meets tomorrow. Despite the fall in inflation recorded in May, it is likely to be a close call when the vote is taken on the level of interest rates.

It is slightly easier to make a case for rates to stay as they are than it was a month ago but, as Governor Mark Carney says, one month’s data should not be looked at in isolation.

Taking Carneys advice, looking at the trend of drivers for a change in monetary policy, it still comes down to a matter of opinion.

How strong is the belief that the rise in inflation was caused primarily by the 20% fall in Sterling following the Brexit referendum? Has the fact that the fall has now “worked its way through” the economy and no longer figures in the YoY data had an effect? Has the subsequent rise for Sterling against the dollar (despite a fall against the Euro) smoothed the trajectory of inflation? Is weak growth data, both Q1 and Q2 were below trend and the IMF has downgraded full year expectations, likely to continue? How would the consumer react to a hike in rates?

Hawk or Dove the vote will probably be close, but this is why these guys “earn the big bucks!”.

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Sterling reacts positively to better than expected Manufacturing data

Manufacturing activity in the U.K recovered from a seven-month low in June to record an unexpected increase in July. Export orders were at their highest level since 2010. It is likely that despite its rise against the dollar, the 7% fall versus the Euro since May will have had some effect.

The Eurozone runs a large trade surplus with the U.K. so the stronger Euro will have major consequences for Eurozone exporters.

Whilst the data is encouraging, manufacturing is a far smaller contributor to U.K growth than services, the data for which will be released later in the week.

The Eurozone released GDP data earlier in the week with growth rising above 2% year on year and 0.6% QoQ. This 0.6% rise is twice the rate at which the U.K. is growing. The IMF predicts 1.9% full year growth in the region.

The Euro remains well supported versus the pound despite being unable to break the 0.9000 level. Against the dollar the march towards 1.2000 continues. There is little to halt its progress as every piece of positive news/data in the Eurozone seems to be presented against an exact opposite release in the U.S.

Continual Political upheaval driving dollar to new depths

The fallout from the sacking of the White House Communications Director Anthony Scaramucci continues to plague the dollar. The dollar index is now 3% below the level it was at before Trump was elected. It is more than 10% lower than its peak in January when traders were prepared to believe that fiscal reform and economic stimulus would follow the simple repeal of Obamacare.

How the reality has differed from the expectation! Trump’s approval rating has slumped to 38%. It should come as no surprise that it is the lowest of any President this early in his first term. He is unable to bring his much vaunted “America First” mantra to bear as he is too busy putting out domestic fires.

However, can it be true that after six months of lies, deceit, evidence of collusion with a hostile foreign government and legislative failure, that 38% of Americans still see Trump as doing a decent job?

That damning statistic should lead us to fear what the next three and a half years could bring.

Have a great day!

About Alan Hill

Alan has been involved in the FX market for more than 25 years and brings a wealth of experience to his content. His knowledge has been gained while trading through some of the most volatile periods of recent history. His commentary relies on an understanding of past events and how they will affect future market performance.”